Sunny, With Clouds

FY2017/2018 was one of those rare years when the Indian economy slowed even as the world economy accelerated. The twin shocks of demonetisation and destocking before the implementation of Goods and Services Tax (GST) and the following glitches culled India's GDP growth down to 6.6 per cent.

Consequently, the average GDP growth over the past four fiscals fell to 7.3 per cent. Even then, India emerged as the fastest-growing large economy globally. The last fiscal may well prove to be a watershed as far as reforms are concerned with the implementation of GST and the Insolvency and Bankruptcy Code (IBC).

These are game changers over the medium term. Despite implementation glitches, GST has helped create a common market, improved logistical efficiencies and increased formalisation of the economy. The National Company Law Tribunal process under the IBC will also speed up the resolution of bad loans beginning with steel and improve corporate credit culture over the medium run.

The economic outlook for the current fiscal, the last year of the Modi government's current term, promises to be sunny, with clouds. It holds true for the global economy too. The good news is that the global economy will pick up speed and is projected to grow at 3.9 per cent in 2018 with the US and the European Union GDP growing at 2.9 per cent and 2.3 per cent, respectively. Global trade, too, is growing faster than GDP for the first time in the last six years, creating opportunities for export growth.

The bad news is that oil is hovering at $80 per barrel and anti-globalisation sentiment/protectionist winds threaten to blow away nascent trade recovery.

After two sub-par years, the Indian economy is expected to grow at 7.5 per cent in 2018/19. On a sobering note, the projected upturn is driven partly by the low-base effect and trails the 10-year average GDP growth of 7.6 per cent. Growth in this fiscal will largely be consumption-driven, aided by some pickup in exports and investments.

We expect an improvement in capacity utilisation this fiscal, particularly in cement, commercial vehicles, steel, aluminium and tractors. But it won't be enough to trigger a robust private sector investment revival. Thankfully, debt-heavy infrastructure companies continue to deleverage.

Political uncertainty due to general elections does not augur well for big-ticket private investment. Only a mild improvement is expected this fiscal with the government's focus on affordable housing and infrastructure creation.

Also, India's oil import dependence (share of oil import in total oil consumption) has risen from 82 per cent in 2011/2012 to about 86 per cent currently. A sharp and sustained increase in global crude prices can singe Indian macros.

We project inflation for 2018/2019 at 4.6 per cent with an upward bias. A back-of-the-envelope estimate shows every $10 rise per barrel of crude oil can increase India's fiscal deficit by 8 basis points (bps) and current account deficit by 40 bps, ceteris paribus.

In an environment of rising yields in the US after exit from quantitative easing, worsening macros raise the spectre of capital outflows and weakening of currency. Some of these are already playing out.

We expect current account deficit to rise to 2.5 per cent of GDP in 2018/19 from 1.9 and 0.7, respectively, in the preceding two years. It is worthwhile to note that even with expected worsening of macro parameters, India is more resilient to external shocks today than it was during the taper tantrum phase in 2013.

Taking growth to 8 per cent-plus and sustaining it over the next three to five years would require a lift through private investments and relentless implementation of reforms.